Budget 2020: What Should The Middle Class Look For?

The current economic landscape in the county is rocky at best. GDP growth is estimated at an 11-year low, consumer confidence is flailing, the jobless rate is going up and there is a general feeling of doom. Adding further fuel to the fire, the fiscal math is not adding up for the government as we are all set to miss our fiscal deficit target. So, while economic activity remains sluggish the government coffers aren’t overflowing either, further impeding its ability to introduce audacious reforms. Ofcourse, sentiment can change in a wink, provided there is some credible evidence of on-ground recovery.

The middle-class demands one and only one thing – a reduction in income tax rates or changes in taxable slabs such that overall tax liability reduces. Now, tax rates can be an effective tool in influencing economic activity by controlling the disposable income in the hands of the consumer. The premise for such a belief is that the money that consumers save by reducing their overall tax liability can eventually be spent on consumption. This is expected to kickstart the consumption cycle where industrial activity picks up in response to increase in demand. However, there are two challenges that the government could encounter. One is that the increased disposable income might not find its way to consumption and may instead be saved and two, the government can ill-afford to reduce its income at the current juncture. 

Another option available to the government is to increase the deduction limit under section 80C of the Income Tax Act, a961. Under this section, investments in certain instruments are allowed as a deduction while calculating an individual’s overall tax liability. The current limit for this deduction is INR 1,50,000. This was last revised in the 2014 budget. While this could have some impact on an individual’s disposable income it is not likely to be as substantial as a direct cut in tax rates. However, this might somewhat address the ongoing liquidity issues in the financial sector as increased funds make their way into the financial sector by way of savings. The government could also include more investments that could fall under the purview of this deduction.

Budget 2020 is going to be a challenging one for the FM as she does a difficult balancing act. There are currently a lot of uncertain variables and it is going to be difficult to peg these down and accordingly create a credible roadmap for the way forward.